Cozen O’Connor: NYS Estate Tax Savings Opportunity [Private Client Services Alert]

NYS Estate Tax Savings Opportunity

Private Client Services Alert

February 12, 2014

Since the implementation in 2011 of federal legislation increasing the federal estate and gift tax exemption to $5,000,000, many New York residents have been making large lifetime gifts in order to substantially reduce their New York estate tax. Recently proposed legislation, if passed, will eliminate this tax reduction strategy by pulling back into the New York taxable estate at death lifetime gifts made by New York residents after March 30, 2014.  There is a short window of opportunity, which may close on April 1, 2014, for New York residents to substantially reduce (and in some cases, eliminate) New York estate tax by making gifts of their remaining federal estate tax exemption amount (the maximum federal exemption is currently $5.34 million per person). The following examples illustrate the potentially significant impact of making gifts before April 1, 2014.

Example 1

Michael has assets valued at $20,000,000 and has not used any of his remaining federal estate tax exemption. Michael dies in December 2014.  The chart below compares the tax results obtained by making a gift prior to or on or after April 1, 2014 (the proposed effective date of the new legislation).

Assets

Gift before
April 1, 2014

Gift after
March 31, 2014

NY Estate Tax

Federal Estate
Tax

Total

$20,000,000

$5,000,000

 

$1,677,800

$5,184,880

$6,862,680

$20,000,000

$0

$5,000,000

$2,327,800

$5,184,880

$7,512,680

Savings as a result of pre-April 1, 2014 gift:

 

-$650,000

 

Note that in each scenario, Michael makes a $5,000,000 gift. However, the timing of the gift has a $650,000 net impact on the total tax bill at Michael’s death. In this example, making the same gift after March 31, 2014 results in a 9 percent increase in the total state and federal tax due at Michael’s death. 

In a more modest estate, the potential savings may, on a relative basis, be even more significant, as shown in the example below.

Example 2

Michael has assets valued at $5,000,000 and has not used any of his federal estate tax exemption. Michael dies in December 2014. Once again, the chart below compares the tax results obtained if Michael were to have made a gift prior to or on or after April 1, 2014 (the proposed effective date of the new legislation).

Assets

Gift before
April 1, 2014

Gift after
March 30, 2014

NY Estate Tax

Federal Estate
Tax

Total

$5,000,000

$3,000,000

$0

$0

$0

$0

$5,000,000

$0

$3,000,000

$391,600

$0

$391,600

Savings as a result of pre-April 1, 2014 gift:

 

-$391,600

 

In this example, not making a pre-April 1, 2014 gift increases the total estate tax bill from 0 to $391,600. Stated differently, making a current gift could eliminate New York estate tax in Michael’s estate, but only if he acts before April 1, 2014.

The proposed legislation is complex, and there are many issues that require clarification. However, if passed, it is certain that the legislation will significantly impact the potential tax saving benefits to New Yorkers of making lifetime gifts. 


Related Practices


If you are interested in discussing the impact of these changes on your estate plan, please contact a member of Cozen O'Connor's Private Client Services Department.